Money has been variously defined by different writers. Perhaps the definition given by Prof. F.A. Walker, though lengthy, is the most comprehensive. He says: "Money is that which passes freely from hand to hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it, and without the intention of the person who receives it to consume it, or enjoy it, or to apply it to any other use than in turn to tender it to others in discharge of debts or full payment for commodities." This definition has been indorsed by several other writers; by some, however, the term money is restricted to coin, paper money being called currency. The distinction is perfectly proper, though not generally concurred in. People commonly use the terms money and currency indiscriminately for both coin and paper money, since they perform identically the same work where both are used together, and the paper is convertible into coin at any time. Where the paper is used alone—"inconvertible paper"—coin is really not money; it ceases to circulate as money; it is hoarded as treasure, or bought and sold as a commodity, but fails to have that general use in current transactions in that country which alone entitles any commodity to be called money.

The distinction sought to be made between paper money and coin arises largely, it is thought, from the idea that coin has a value in itself which paper money has not. This idea is erroneous. Value, as we have seen, is a ratio or relation, and though the value of anything is based on a desire for it, that desire may arise either from the satisfaction which the use or consumption of it will bring, or from the belief that it can be exchanged for some other thing that will give satisfaction in use or consumption. The value of money is due to the latter of these two causes. No one wants money except for the purpose of exchanging it for other commodities; under modern conditions it is necessary for this purpose,—it is the indispensable requisite to the satisfaction of certain human wants. Money, therefore, possesses an indirect if not a direct subjective value which forms the basis of its exchange value. Paper money possesses the power of satisfying this need for money to the same extent that coin does, under like conditions, and it has, therefore, both subjective value and exchange value, and the latter is governed by the same law of supply and demand that operates in all cases. The fact that the material of which the money is made is, in one instance, of great cost, and, in the other, of little or no cost, is of minor consequence. The minting of gold and silver into coin may, or may not, add to its value; it really transforms it into another commodity—money—and its value is thenceforth determined by the law of supply and demand as applied to money. The same is true of paper money, the low cost in the production of which is not an element in determining its value, for its production is always a monopoly. There is no reason, then, for not considering paper currency as money, and in using the term we will consider its meaning to be that given by Professor Walker,—which is also its popular significance,—and as including both paper money and coin.

It should be considered, whether of one material or of several circulating concurrently, as a single commodity created for the purpose it fulfils, and as separate and distinct from the material of which it is made. In short, as that commodity to which, by common consent and usage, generally sanctioned by law, all other commodities are referred as a measure of value, and by means of which exchanges are effected.

The Functions and Requirements of Money.

Professor Jevons, in his valuable work, "Money and the Mechanism of Exchange," gives to money the following threefold functions, viz. as:—

A medium of exchange.

A measure of value.

A standard of deferred payments.

He also inquires if it does not perform a fourth function as a 'store of value.'

All authorities give the first two of the above as the principal money functions. Some include one or both of the others, and some omit both.

Prof. F.A. Walker objects to the use of the term "measure of value," on the ground that value, being a relation, cannot be measured but can only be expressed. He proposes, instead, the term, "common denominator of value." It is not quite clear why a relation or ratio cannot be measured,—the measure, of course, being a similar ratio,—nor does there seem to be anything gained by the change, while the term proposed seems less clear and correct than the one in general use. Money, or the value of the unit of money, is used as a measure in comparing the values of other things just as a yardstick, or the length of a yard, is used in comparing the lengths of other objects.

Money, in acting as a medium of exchange, must also act as a store of value to some extent, since it stores the value received until it is expended; but the use of money for the purpose of hoarding is not to be regarded as strictly one of its functions, at least not in the sense of requiring to be especially provided for. The fact that it is so used, however, should be borne in mind, as it interferes more or less with its other and more important functions; but in considering the qualities necessary to the best performance of the functions of money we may omit this last function, as any money which fills the requirements for the others will fulfil those necessary to this in a sufficient degree considering its minor importance. As our inquiries in this work will be confined to the money materials now in general use, viz., gold, silver, and paper, we need not consider the qualities necessary to a money material, as given by Professor Jevons,—such as portability, indestructibility, divisibility, etc.,—further than to say that the qualities he mentions are possessed by all of the money materials now in use, in a sufficient and nearly equal degree. Coin, to be sure, is more indestructible than paper; but as the paper is sufficiently acceptable for the purpose, the difference need not concern us.

Aside from that general acceptability, which is the very essence of money,—without which no commodity could be considered money, and which, therefore, all money may be considered as having,—the great requirements of money are invariable value, added to convenience of form, size, weight, and value.

This latter requirement pertains to the function of a medium of exchange, and the degree in which it is possessed by the different money materials or kinds of money, depends wholly on the values to be transferred by its use. For small amounts, silver is preferable to either gold or paper; as the amount increases, gold becomes preferable to silver; and for all amounts above fractional currency, paper money is unquestionably more convenient in every way than either gold or silver, and the advantage increases with the amount.

Invariable value is the great requirement for both the functions,—"a measure of value" and "a standard of deferred payments." Indeed these two functions may practically be considered one; the only difference between them being centred in the element of time, and that is more or less involved in every exchange requiring the use of money, since some interval must elapse between the sale of one commodity and the purchase of another with the money received,—which constitutes the whole exchange transaction,—and during such interval the money should maintain a constant value. When the interval over which the transaction is spread is a large one, as in the case of notes and bonds, any variability is more noticeable than when the change is distributed among many holders of money.

Before considering further the great necessity for invariable money value, it will be best to consider the laws and forces which determine and control the value of money.

Money Value.

That money is a commodity, and that its value varies like that of every commodity in accordance with the law of supply and demand, are incontestable. The fluctuations in the value of money can be detected, it is clear, in the same way that changes in the value of any commodity can be detected, by comparison with all other commodities,—by its average purchasing power, in short.

The value of a commodity, when measured by money and expressed in terms of the unit of money, is called its price. If the prices of all commodities, or the average of all, rise or fall, it is conclusive evidence that the value of money has changed, for its purchasing power is less in the one case and greater in the other. Indeed the statement that general prices have fallen is equivalent to saying that the value of money has increased, and vice versa. Therefore, if the value of money remains stable, average prices must remain constant.

The following quotations will show that these views are correct, and that they are generally accepted by authorities on finance and political economy, though very commonly overlooked and neglected in discussions on the subject.

John Stuart Mill, in his "Principles of Political Economy," says:—

"There is such a thing as a general rise of prices. All commodities may rise in their money price. But there cannot be a general rise of values. It is a contradiction in terms." "That the money prices of all things should rise or fall, provided all rise or fall equally, is in itself, and apart from existing contracts, of no consequence. It affects nobody's wages, profits, or rent. Every one gets more money in the one case and less in the other; but of all that is to be bought with money they get neither more nor less than before. It makes no other difference than that of using more or fewer counters to reckon by. The only thing which in this case is really altered in value is money; and the only persons who either gain or lose are the holders of money, or those who have to receive or pay fixed sums of it.... There is a disturbance, in short, of fixed money contracts, and this is an evil whether it takes place in the debtor's favour or in the creditor's.... Let it therefore be remembered (and occasions will often rise for calling it to mind) that a general rise or a general fall of values is a contradiction; and that a general rise of prices is merely tantamount to an alteration in the value of money, and is a matter of complete indifference save in so far as it affects existing contracts for receiving and paying fixed pecuniary amounts."

"The value of a thing is what it will exchange for: the value of money is what money will exchange for; the purchasing power of money. If prices are low, money will buy much of other things, and is of high value; if prices are high, it will buy little of other things, and is of low value. The value of money is inversely as general prices: falling as they rise and rising as they fall."

"The value of money, other things being the same, varies inversely as its quantity; every increase of quantity lowering the value, and every diminution raising it in a ratio exactly equivalent."

"That an increase of the quantity of money raises prices, and a diminution lowers them, is the most elementary proposition in the theory of currency."

The expression, "other things being the same," in one of these quotations, evidently means "demand remaining the same," and the terms increase and decrease of money unquestionably refer to the increase and decrease relative to demand, since the writer further says:—

"If there be at any time an increase in the number of money transactions, a thing continually liable to happen from differences in the activity of speculation, and even in the time of year (since certain kinds of business are transacted only at particular seasons); an increase of the currency which is only proportional to this increase of transactions, and is of no longer duration, has no tendency to raise prices."

Per contra, therefore, unless the currency be increased to meet such increased demand, there will be a tendency to decreased prices and consequent change in the value of money.

Stronger statements than these of Mill's, or by an abler authority, could not be asked for.

Prof. R.T. Ely, in his "Political Economy," remarks, p.179:—

"Values are merely relative, and consequently there can be no such thing as a general rise or fall of values."

"Value expressed in money is called price. There can be such a thing as a general fall or a general rise of prices. A general fall in prices means an increase in the value of money, and a general rise of prices means a fall in the value of money."

David Ricardo observes that:—

"The value of money, then, does not wholly depend upon its absolute quantity, but on its quantity relatively to the payments it has to accomplish."

The last edition of the "EncyclopÆdia Britannica" says, as a conclusion in discussing the value of money, and referring evidently to coin alone:—

"The most correct way to regard the question of money value is that which looks on supply and demand, as interpreted above, as the regulator of its value for a limited time, while regarding cost of production as a force exercising an influence of uncertain amount on its fluctuations during long periods."

This view is in exact accordance with the conclusions previously stated in regard to the values of all commodities.

The EncyclopÆdia further says:—

"Where the coinage of a State is artificially limited, the value of its money plainly depends on supply and demand."

Quotations might be multiplied indefinitely to the same effect; but enough have been given to show the general consensus of opinion. Indeed it may seem that there is no necessity for accumulating evidence in support of propositions so apparent as those stated; unfortunately, however, not a few recent writers have ignored some of them, and the general public seem to make the same mistake; hence, it is of the utmost importance that they be kept clearly in mind.

Money Demand and Supply.

Mill affirms that: "The supply of money is all the money in circulation at the time."

Money that is hoarded has no more effect on prices than if it did not exist. Money lying in banks or in the hands of merchants or others to the extent necessary for the safe conduct of their business may be considered money in circulation, but beyond the amount needed for conducting any business the excess may be considered as hoarded. The supply of money in any country depends directly and primarily on the legislation of that country; and secondarily, in most, but not in all cases, on the legislation of other countries, and the production of precious metals available for coinage, etc., all of which can be better analyzed in explaining the different systems.

The demand for money is most complicated, since it is affected by a great variety of forces. It varies directly with the activity of commerce, and universally with the activity of money,—a less amount of money doing a greater work when active than when sluggish. It is affected by changes in the customs and habits of the people, by changes in transportation facilities, in diversity of employment, in concentration of population, and, more than all other, it is affected by the extent of credit, the use of banking facilities, etc.

Credit in its various forms takes the place of money, and does its work in this respect to an enormous and continually increasing extent. Through the medium of banks,—which are really institutions for the exchange of credit,—and by means of checks, drafts, notes, bills of exchange, letters of credit, post-office and express money orders, etc., the great bulk of the world's business is transacted.

Statistics gathered from national banks in this country in 1881, showed that of the total deposits, ninety-five (95) per cent were in forms of credit to five (5) per cent in actual money, the percentage of credit paper rising in New York City to as high as 98.7.

While these percentages may not show accurately, on the whole, the relative work done by money and by forms of credit, they do show the enormous extent to which credit takes the place of money, and the greatly increased demand for money that arises, when, from lack of confidence or other causes, the extent of the credit is lessened. Unless the volume of money immediately adapts itself to such demand, the value of money must inevitably increase, or the demand be lessened by a checking of all business transactions, and a partial paralysis of the industries of the country. Generally both of these results follow. With these facts in mind, it is evidently futile to attempt to fix any definite amount of money, per capita, as the proper one. Not only does the amount necessary to meet the demand vary with different countries, per capita, even among the most civilized nations, but it varies with the seasons in each country, as crops have to be moved or not, and with the state of credit and enterprise from day to day. France, where the habits and customs of the people have prevented their making so large a use of credit and banking facilities as in England, requires a larger amount of money, per capita, than does England.

Since the value of money depends on these two factors, supply and demand, if we are to have a money of invariable value, we must evidently control one or both of these. It would be hopeless to attempt to control all the various conditions and forces which, we have seen, affect the demand for money. Fortunately it is not necessary. We cannot control the demand, but we have, or can have, complete control over the supply, and we can by this means maintain that constant relation between the supply of, and the demand for, money which is essential to its stability of value.

Necessity for Invariable Money Value.

Returning to the reasons for an invariable money value, they are best appreciated by considering the effects of one that is variable. While the statement of Mill, previously quoted, "that the money prices of all things should rise or fall, provided all rise or fall equally, is in itself and apart from existing contracts, of no consequence," is true, yet is it true only under the condition specified, that all shall rise or fall equally, and this condition in the case of a fluctuating money value never obtains. Aside from the exception which Mill makes of fixed money contracts, which can never adjust themselves at all to a changed money value,—and the exception is of enormous volume and importance,—the prices of many commodities are not adjustable quickly or readily to a change in money value, especially when such change is an increase. There is a persistency or inertia about prices that in many instances resists a reduction. Wages can never be reduced without friction and often strikes. The fact that commodities have fallen and that the lower wages will buy as much, or more, than the higher ones formerly did, is slow of appreciation; hence the employer caught between the difficulty of reducing his employÉs' wages and the falling prices of his products, is injured by an increased money value. When the change, on the other hand, is a decrease of money value, the employer will not as a rule advance wages until compelled to do so, and the labourer suffers meanwhile from the rising prices of commodities.

When prices fall, the producers of a commodity are not apt to recognize that it is a general fall, a change in money value; but accustomed to regard money as invariable in value, as it should be, and, failing to see anything in the conditions affecting their own particular product that should lower the price, they delay or refuse to sell, hoping for higher prices; and all, or a large number, doing this, makes business dull.

The great injury and evil of changing money value comes, however, through fixed money contracts. The enormous amount of bonded indebtedness, railroad, municipal, county, state, and national, makes the slightest change of money value of vast importance, and added to these is the aggregate volume of commercial and private debts.

In short, a change of money value either way is a robbery, and none the less reprehensible because it is legal and insidious. Indeed, it is perhaps more damaging in its secondary effects because of its insidiousness. An open danger may be guarded against, but the hidden danger, known to exist, but which cannot be located or prevented, only excites fear and distrust, and checks all movement. Nor is the damage, in its secondary effects, confined to those involved in fixed money contracts. Piracy on the seas or robbery on a highway, when common, injure not alone those who are robbed. The fear and distrust engendered by such occurrences damage and delay all commerce; and the cost of protection against these menaces, or of avoiding them by taking more circuitous routes, are a burden on the whole people. So the robbery by a fluctuating money value affects, indirectly, the whole community, while the indirect effects are far worse. In the case of a decreasing money value the robbery does not bring such disastrous consequences in its train as where the change is an increase, owing to the different conditions of the people robbed.

A slight decrease of money value generally brings about a stimulation of trade and industry, the rising prices of commodities acting as a spur to greater production and new enterprises. Mr. F.A. Walker, indeed, considers that for this reason, and in spite of the recognized injustice to some classes, that such a condition when slight and brought about by natural causes, is a benefit on the whole. It can hardly be admitted that robbery of one large class in a community is defensible, even if it does result in a gain to another class greater than the loss to the first. It is indisputable, however, that the opposite case, where money is increasing in value, brings such disasters in its train that it would be better, if an invariable value for money could not be attained, that the variation should be a decrease rather than an increase. In the latter case not only is the robbery equally great, but falling upon the most active, industrious, and enterprising class of the community,—for it is this class as a rule that are borrowers,—it not only imperils all they possess, but discourages, when long continued, all forms of industry and enterprise. In this way it throws thousands of men out of employment and brings suffering and hardship to thousands more. No other one cause, perhaps, is more responsible for "panics" and "hard times," with their attendant evils—tramps, pauperism, and crime. Its evils have been painted by many writers, and it is scarcely possible to exaggerate them. Of all ills, war and pestilence alone seem to fill the cup of human suffering more nearly full than the depression and stagnation of industry which is brought about by constantly declining prices.

In view of these facts, the necessity for a money that shall vary in its amount in accordance with the demands of business is evident. Not only must it respond to the long-continued, slow, and almost imperceptible increase of demand due to growing trade and population, but it should also respond, quickly and surely, to those sudden demands, known as panics, when credit fails for any reason to do its usual work. This need is recognized by bankers in their demand for a flexible or elastic currency. Quotations are hardly necessary in support of the foregoing statements, but a few may be given. David Ricardo, in "Proposals for an Economic and Secure Currency," observes that:—

"All writers on the subject of money have agreed that uniformity in the value of the circulating medium is an object greatly to be desired."

"A currency may be considered as perfect of which the standard is invariable, which always conforms to that standard, and in the use of which the utmost economy is practised."

"During the late discussions on the bullion question, it was most justly contended, that a currency to be perfect should be absolutely invariable in value."

Prof. J.L. Laughlin, in "The History of Bi-metallism in the United States," remarks, p.70:—

"The highest justice is rendered by the state when it exacts from the debtor at the end of a contract the same purchasing power which the creditor gave him at the beginning of the contract, no less, no more."

Prof. R.T. Ely says, in his "Political Economy," p.191:—

"It is not the 'much or little,' but it is the 'more or less' that is of vital concern. Nothing produces more intense suffering than a decrease in the amount of money, and this is on account of the connection between past, present, and future in our economic life."

This refers to a decrease relative to the demand, evidently, and he says, further:—

"If the amount of money is arbitrarily increased, so that the value of all debts may fall, it amounts to virtual robbery of the creditors. When arbitrarily the amount of money is decreased, it amounts to virtual robbery of the debtor class."

"It may also be urged that with the progress of improvements in industry, prices tend to fall, and that unless money increases in amount, those who take no active part in these improvements, nevertheless gain the benefit of them."

Prof. Sidney Sherwood, in the "History and Theory of Money," says, p.225:—

"The ideal that we want, so far as price adjustment is concerned, is to keep prices stable, so that a contract which is payable in one year from now can be paid with just the amount of commodities which will then represent the value stated in the contract of to-day....

"That is what we want,—a stability of prices that persists from one year to another and from one generation to another....

"The object at which we aim is, as it seems to me, a currency which shall keep prices stable, a currency which shall expand, therefore, with the expansion of trade and commerce and development generally, a currency which shall not be lagging behind the commerce and development of the country, and hindering that development, and a currency which shall not, by being too rapidly increased, lead to excessive speculation and to loss."

We may summarize these conclusions in regard to money then as follows:—

Money should have an invariable value.

The test of invariable money value is stability of prices in general.

The value of money depends on the supply of it relative to the demand for it.

The demand for money is variable and uncertain. It is affected by a great variety of circumstances, most of which are beyond control.

The supply is in all cases regulated directly or indirectly by law, and can be controlled.

In any monetary system it is necessary, therefore, that the supply should adjust itself quickly and correctly to any changes in demand, so that prices of all commodities shall, on the average, neither rise nor fall. In this way, and in no other, can an honest money be obtained.

It is believed that these conclusions cannot be successfully controverted, and, using them as a basis, we now purpose to examine existing monetary systems, and some proposed changes therein, to see in how far they conform to this requirement, and what can be done for their improvement.